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    Bank of Finland, Rauhankatu 19 B, Helsinki

Alexei Karas (University College Roosevelt): Relationship lending during a trust crisis on the interbank market: A friend in need is a friend indeed

Co-authors: Hans Degryse (KU Leuven) and Koen Schoors (Ghent University)

We exploit uncertainty regarding banks' involvement in money laundering activities as a natural experiment to study the functioning of the interbank market in uncertain times. We show that bank couples with a stronger relationship (i.e., more frequent and reciprocal interactions before the event) are more likely to continue lending to one another, and at lower interest rates. This is in line with a "helping hand" or "flight to friends" hypothesis during crisis.

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